© The Institute of Chartered Accountants of India

PAPER – 1: ACCOUNTING
ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY

FOR MAY 2021 EXAMINATION
A. Applicable for May, 2021 examination

I. Amendments in Schedule III (Division I) to the Companies Act, 2013
In exercise of the powers conferred by sub-section (1) of section 467 of the
Companies Act, 2013), the Central Government made the following amendments in
Division I of the Schedule III with effect from the date of publication of this notification
in the Official Gazette:
(A) under the heading “II Assets”, under sub-heading “Non-current assets”, for the
words “Fixed assets”, the words “Property, Plant and Equipment” shall be
substituted;
(B) in the “Notes”, under the heading “General Instructions for preparation of
Balance Sheet”, in paragraph 6,-
(I) under the heading “B. Reserves and Surplus”, in item (i), in sub- item (c),
the word “Reserve” shall be omitted;
(II) in clause W., for the words “fixed assets”, the words “Property, Plant and
Equipment” shall be substituted.
II. Amendments in Schedule V to the Companies Act, 2013
In exercise of the powers conferred by sub-sections (1) and (2) of section 467 of the
Companies Act, 2013, the Central Government hereby makes the following
amendments to amend Schedule V.
In PART II, under heading “REMUNERATION”, in Section II - ,
(a) in the heading, the words “without Central Government approval” shall be
omitted;
(b) in the first para, the words “without Central Government approval” shall be
omitted;
(c) in item (A), in the proviso, for the words “Provided that the above limits shall be
doubled” the words “Provided that the remuneration in excess of above limits
may be paid” shall be substituted;
(d) in item (B), for the words “no approval of Central Government is required” the
words “remuneration as per item (A) may be paid” shall be substituted;
(e) in Item (B), in second proviso, for clause (ii), the following shall be substituted,
namely:-
“(ii) the company has not committed any default in payment of dues to any bank
© The Institute of Chartered Accountants of India

2 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021
or public financial institution or non-convertible debenture holders or any other

secured creditor, and in case of default, the prior approval of the bank or public
financial institution concerned or the non-convertible debenture holders or other
secured creditor, as the case may be, shall be obtained by the company before
obtaining the approval in the general meeting.";
(f) in item (B), in second proviso, in clause (iii), the words “the limits laid down in”
shall be omitted;
In PART II, under the heading “REMUNERATION”, in Section III, –
(a) in the heading, the words “without Central Government approval” shall be
omitted;
(b) in first para, the words “without the Central Government approval” shall be
omitted;
(c) in clause (b), in the long line, for the words “remuneration up to two times the
amount permissible under Section II” the words “any remuneration to its
managerial persons”, shall be substituted;
III. Notification dated 13th June, 2019 to exempt startup private companies from
preparation of Cash Flow Statement as per Section 462 of the Companies
Act 2013
As per the Amendment, under Chapter I, clause (40) of section 2, an exemption has
been provided to a startup private company besides one person company, small
company and dormant company. Accordingly, a startup private company is not
required to include the cash flow statement in the financial statements.
Thus the financial statements, with respect to one person company, small company,
dormant company and private company (if such a private company is a start-up), may
not include the cash flow statement.
IV. Amendment in AS 11 “The Effects of Changes in Foreign Exchange Rates”
In exercise of the powers conferred by clause (a) of sub-section (1) of section 642 of
the Companies Act, 1956, the Central Government, in consultation with National
Advisory Committee on Accounting Standards, hereby made the amendment in the
Companies (Accounting Standards) Rules, 2006, in the "ANNEXURE", under th e
heading "ACCOUNTING STANDARDS" under "AS 11 on The Effects of Changes in
Foreign Exchange Rates", for the paragraph 32, the following paragraph shall be
substituted, namely :-
"32. An enterprise may dispose of its interest in a non-integral foreign operation
through sale, liquidation, repayment of share capital, or abandonment of all, or part
of, that operation. The payment of a dividend forms part of a disposal only when it
constitutes a return of the investment. Remittance from a non-integral foreign
operation by way of repatriation of accumulated profits does not form part of a

PAPER – 1 : ACCOUNTING 3
disposal unless it constitutes return of the investment. In the case of a partial disposal,
only the proportionate share of the related accumulated exchange differences is
included in the gain or loss. A write-down of the carrying amount of a non-integral
foreign operation does not constitute a partial disposal. Accordingly, no part of the
deferred foreign exchange gain or loss is recognized at the time of a write -down".
V. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (reg.
Issue of Bonus Shares)
A listed company, while issuing bonus shares to its members, must comply with the
following requirements under the SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2018:
Regulation 293 - Conditions for Bonus Issue
Subject to the provisions of the Companies Act, 2013 or any other applicable law, a
listed issuer shall be eligible to issue bonus shares to its members if:
(a) it is authorized by its articles of association for issue of bonus shares,
capitalization of reserves, etc.: Provided that if there is no such provision in the
articles of association, the issuer shall pass a resolution at its general body
meeting making provisions in the articles of associations for capitalization of
reserve;
(b) it has not defaulted in payment of interest or principal in respect of fixed deposits
or debt securities issued by it;
(c) it has not defaulted in respect of the payment of statutory dues of the employees
such as contribution to provident fund, gratuity and bonus;
(d) any outstanding partly paid shares on the date of the allotment of the bonus
shares, are made fully paid-up;
(e) any of its promoters or directors is not a fugitive economic offender.
Regulation 294 - Restrictions on a bonus issue
(1) An issuer shall make a bonus issue of equity shares only if it has made
reservation of equity shares of the same class in favour of the holders of
outstanding compulsorily convertible debt instruments if any, in proportion to the
convertible part thereof.
(2) The equity shares so reserved for the holders of fully or partly compulsorily
convertible debt instruments, shall be issued to the holder of such convertible
debt instruments or warrants at the time of conversion of such convertible debt
instruments, optionally convertible instruments, warrants, as the case may be,
on the same terms or same proportion at which the bonus shares were issued.
(3) A bonus issue shall be made only out of free reserves, securities premium
account or capital redemption reserve account and built out of the genuine

profits or securities premium collected in cash and reserves created by

revaluation of fixed assets shall not be capitalized for this purpose.
(4) Without prejudice to the provisions of sub-regulation (3), bonus shares shall not
be issued in lieu of dividends.
(5) If an issuer has issued Superior Voting Right (SR) equity shares to its promoters
or founders, any bonus issue on the SR equity shares shall carry the same ratio
of voting rights compared to ordinary shares and the SR equity shares issued in
a bonus issue shall also be converted to equity shares having voting rights same
as that of ordinary equity shares along with existing SR equity shares. ]
Regulation 295 - Completion of a bonus issue
(1) An issuer, announcing a bonus issue after approval by its board of directors and
not requiring shareholders’ approval for capitalization of profits or reserves for
making the bonus issue, shall implement the bonus issue within fifteen days
from the date of approval of the issue by its board of directors: Provided that
where the issuer is required to seek shareholders’ approval for capitalization of
profits or reserves for making the bonus issue, the bonus issue shall be
implemented within two months from the date of the meeting of its board of
directors wherein the decision to announce the bonus issue was taken subject
to shareholders’ approval.
Explanation:
For the purpose of a bonus issue to be considered as ‘implemented’ the date of
commencement of trading shall be considered.
(2) A bonus issue, once announced, shall not be withdrawn.
VI. Companies (Share Capital and Debentures) Amendment Rules, 2019 – reg.
Debenture Redemption Reserve
In exercise of the powers conferred by sub-sections (1) and (2) of section 469 of the
Companies Act, 2013 (18 of 2013), the Central Government made the Companies
(Share Capital and Debentures) Amendment Rules, 2019 dated 16th August, 2019 to
amend the Companies (Share Capital and Debentures) Rules, 2014. As per the
Companies (Share Capital and Debentures) Amendment Rules, under principal rules,
in rule 18, for sub-rule (7), the following sub-rule shall be substituted, namely: -
“(7) The company shall comply with the requirements with regard to Debenture
Redemption Reserve (DRR) and investment or deposit of sum in respect of
debentures maturing during the year ending on the 31st day of March of next year, in
accordance with the conditions given below:-
(a) Debenture Redemption Reserve shall be created out of profits of the company
available for payment of dividend;

(b) the limits with respect to adequacy of Debenture Redemption Reserve and
investment or deposits, as the case may be, shall be as under;-
(i) Debenture Redemption Reserve is not required for debentures issued by
All India Financial Institutions regulated by Reserve Bank of India and
Banking Companies for both public as well as privately placed debentures;
(ii) For other Financial Institutions within the meaning of clause (72) of section
2 of the Companies Act, 2013, Debenture Redemption Reserve shall be as
applicable to Non –Banking Finance Companies registered with Reserve
Bank of India.
(iii) For listed companies (other than All India Financial Institutions and Banking
Companies as specified in sub-clause (i)), Debenture Redemption Reserve
is not required in the following cases - (A) in case of public issue of
debentures – A. for NBFCs registered with Reserve Bank of India under
section 45-IA of the RBI Act, 1934 and for Housing Finance Companies
registered with National Housing Bank; B. for other listed companies; (B)
in case of privately placed debentures, for companies specified in sub-
items A and B.
(iv) for unlisted companies, (other than All India Financial Institutions and
Banking Companies as specified in sub-clause (i)) -
(A) for NBFCs registered with RBI under section 45-IA of the Reserve
Bank of India Act, 1934 and for Housing Finance Companies
registered with National Housing Bank, Debenture Redemption
Reserve is not required in case of privately placed debentures.
(B) for other unlisted companies, the adequacy of Debenture Redemption
Reserve shall be ten percent. of the value of the outstanding
debentures;
(v) In case a company is covered in item (A) or item (B) of sub-clause (iii) of
clause (b) or item (B) of sub-clause (iv) of clause (b), it shall on or before
the 30th day of April in each year, in respect of debentures issued by a
company covered in item (A) or item (B) of sub clause (iii) of clause (b) or
item (B) of sub-clause (iv) of clause (b), invest or deposit, as the case may
be, a sum which shall not be less than fifteen per cent., of the amount of
its debentures maturing during the year, ending on the 31st day of March
of the next year in any one or more methods of investments or deposits as
provided in sub-clause (vi):
Provided that the amount remaining invested or deposited, as the case may
be, shall not at any time fall below fifteen percent. of the amount of the
debentures maturing during the year ending on 31st day of March of that
year.

(vi) for the purpose of sub-clause (v), the methods of deposits or investments,
as the case may be, are as follows:— (A) in deposits with any scheduled
bank, free from any charge or lien; (B) in unencumbered securities of the
Central Government or any State Government; (C) in unencumbered
securities mentioned in sub-clause (a) to (d) and (ee) of section 20 of the
Indian Trusts Act, 1882; (D) in unencumbered bonds issued by any other
company which is notified under sub-clause (f) of section 20 of the Indian
Trusts Act, 1882:
Provided that the amount invested or deposited as above shall not be used
for any purpose other than for redemption of debentures maturing during
the year referred above.
(c) in case of partly convertible debentures, Debenture Redemption Reserve shall
be created in respect of non-convertible portion of debenture issue in
accordance with this sub-rule.
(d) the amount credited to Debenture Redemption Reserve shall not be utilized by
the company except for the purpose of redemption of debentures.”
NOTE: October, 2020 Edition of the Study Material on Paper 1 Accounting is applicable
for May, 2021 Examination which incorporates the above amendments. The students who
have editions prior to October, 2020 may refer above amendments.
B. Not applicable for May, 2021 examination
Non-Applicability of Ind AS for May, 2021 Examination
The Ministry of Corporate Affairs has notified Companies (Indian Accounting Standards)
Rules, 2015 on 16 th February, 2015, for compliance by certain class of companies. These
Ind AS are not applicable for May, 2021 Examination.
PART – II: QUESTIONS AND ANSWERS
QUESTIONS
Financial Statements of Companies

1. Om Ltd. has authorized capital of ` 50 lakhs divided into 5,00,000 equity shares of ` 10
each. Their books show the following ledger balances as on 31 st March, 2021:
` `
Inventory 1.4.2020 6,65,000 Bank Current Account (Dr. 20,000
balance)
Discounts & Rebates allowed 30,000 Cash in hand 11,000

Carriage Inwards 57,500

Purchases 12,32,500 Calls in Arrear @ ` 2 per
share 10,000
Rate, Taxes and Insurance 55,000 Equity share capital 20,00,000
Furniture & Fixtures 1,50,000 (2,00,000 shares of ` 10
each)
Business Expenses 56,000 Trade Payables 2,40,500
Wages 14,79,000 Sales 36,17,000
Freehold Land 7,30,000 Rent (Cr.) 30,000
Plant & Machinery 7,50,000 Transfer fees received 6,500
Engineering Tools 1,50,000 Profit & Loss A/c (Cr.) 67,000
Trade Receivables 4,00,500 Repairs to Building 56,500
Advertisement Expenses 15,000 Bad debts 25,500
Commission & Brokerage 67,500
Expenses
The inventory (valued at cost or market value, which is lower) as on 31 st March, 2021 was
` 7,05,000. Outstanding liabilities for wages ` 25,000 and business expenses ` 36,500. It
was decided to transfer ` 10,000 to reserves.
Charge depreciation on written down values of Plant & Machinery @ 5%, Engineering
Tools @ 20% and Furniture & Fixtures @10%. Provide ` 25,000 as doubtful debts for trade
receivables. Provide for income tax @ 30%. It was decided to transfer ` 10,000 to
reserves.
You are required to prepare Statement of Profit & Loss for the year ended 31st March,
2021 and Balance Sheet as at that date.
2. (a) XYZ Ltd. is having inadequacy of profits in the year ending 31-03-2021 and it
proposes to declare 10% dividend out of General Reserves.
From the following particulars ascertain the amount that can be utilized from general
reserves, according to the Companies (Declaration of Dividend out of Reserves)
Rules, 2014:
5,00,000 Equity Shares of ` 10 each fully paid up 50,00,000
General Reserves 25,00,000
Revaluation Reserves 6,50,000
Net profit for the year 1,42,500
Average rate of dividend during the last five years has been 12%.

(b) Mohit Ltd. provides the following information as on 31st March, 2021:
Liabilities `
Authorized capital:
1,00,000, 14% preference shares of `100 1,00,00,000
10,00,000 Equity shares of `100 each 10,00,00,000
11,00,00,000
Issued and subscribed capital:
77,500, 14% preference shares of ` 100 each fully paid 77,50,000
5,40,000 Equity shares of ` 100 each, ` 80 paid-up 4,32,00,000
Share suspense account 90,00,000
Reserves and surplus
Capital reserves (` 5,00,000 is revaluation reserve) 8,77,500
Securities premium 2,25,000
Secured loans:
15% Debentures 2,92,50,000
Unsecured loans:
Public deposits 16,65,000
Cash credit loan from SBI (short term) 5,92,500
Current Liabilities:
Trade Payables 15,52,500
Assets:
Investment in shares, debentures, etc. 3,50,50,000
Profit and Loss account (Dr. balance) 68,50,000
Share suspense account represents application money received on shares, the

allotment of which is not yet made. You are required to compute effective capital as
per the provisions of Schedule V if Mohit Ltd is non-investment company. Would your
answer differ if Mohit Ltd. is an investment company?

Cash Flow Statement

3 The following are the extracts of Balance Sheet and Statement of Profit and Loss of Supriya
Ltd.:
Extract of Balance Sheet
Particulars Notes 2021 2020
(` ’000) (` ’000)
Equity and Liabilities
1 Shareholder’s funds
(a) Share capital 1 500 200
2 Non- current liabilities
(a) Long term loan from bank --- 250
3 Current liabilities
(a) Trade Payables 1,000 3,047
Assets
1 Non-current assets
(a) Property, Plant and Equipment 230 128
2 Current assets
(a) Trade receivables 2,000 4,783
(b) Cash & cash equivalents (Cash balance) 212 35
Extract of Statement of Profit and Loss
Particulars Notes 2021 2020
(` ’000) (` ’000)
I Expenses:
Employee benefits expense 69 25
Other expenses 2 115 110
II Tax expense:
Current tax (paid during year) 243 140
Notes to accounts
2021 (`’000) 2020 (`’000)
1 Share Capital
Equity Shares of `10 each, fully paid up 500 200
2 Other expenses
Overheads 115 110

Prepare Cash Flow Statement of Supriya Ltd. for the year ended 31st March, 2021 in
accordance with AS-3 (Revised) using direct method. All transactions were done in cash
only. There were no outstanding/prepaid expenses as on 31st March, 2020 and on 31 st
March, 2021. Ignore deprecation. Dividend amounting ` 80,000 was paid during the year
ended 31st March, 2021.
Profit/Loss prior to Incorporation
4. (a) Megha Ltd. was incorporated on 1.7.2020 to take over the running business of M/s
Happy from 1.4.2020. The accounts of the company were closed on 31.3.2021.
The average monthly sales during the first three months of the year (2020-21) was
twice the average monthly sales during each of the remaining nine months.
You are required to compute time ratio and sales ratio for pre and post incorporation
periods.
(b) The Business carried on by Kamal under the name "K" was taken over as a running
business with effect from 1 st April, 2020 by Sanjana Ltd., which was incorporated on
1st July, 2020. The same set of books was continued since there was no change in
the type of business and the following particulars for the year ended
31st March, 2021 were available:
` `
Sales: Company period (1.7.20 to 31.3.21) 40,000
Prior period (1.4.20 to 30.6.20) 10,000 50,000
Selling Expenses 3,500
Preliminary Expenses written off 1,200
Salaries paid 3,600
Directors' Fees 1,200
Interest on Capital (Upto 30.6.2020) 700
Depreciation 2,800
Rent expense 4,800
Purchases: Company period (1.7.20 to 31.3.21) 21,875
Prior period (1.4.20 to 30.6.20) 3,125
Carriage Inwards 1,000 43,800
Net Profit 6,200
You are required to prepare a statement showing the amount of pre and post
incorporation period profits stating the basis of allocation of expenses.
Accounting for Bonus Issue
5. Following is the information of Umesh Ltd. as at 31 st March, 2021:

`
Authorized capital:
30,000 12% Preference shares of ` 10 each 3,00,000
4,00,000 Equity shares of ` 10 each 40,00,000
43,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of ` 10 each fully paid 2,40,000
3,00,000 Equity shares of ` 10 each, ` 8 paid up 24,00,000
Reserves and surplus:
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000
On 1st April, 2021, the Company has made final call @ ` 2 each on 3,00,000 equity shares.
The call money was received by 20 th April, 2021. Thereafter, the company decided to
capitalize its reserves by way of bonus at the rate of one share for every four shares held.
You are required to prepare necessary journal entries in the books of the company.
Right Issue
6. (a) Beta Ltd. having share capital of 20,000 equity shares of `10 each decides to issue
rights share at the ratio of 1 for every 8 shares held at par value. Assuming all the
share holders accepted the rights issue and all money was duly received, pass journal
entry in the books of the company.
(b) Omega Ltd. offers new shares of ` 100 each at 25% premium to existing shareholders
on the basis one for five shares. The cum-right market price of a share is ` 200. You
are required to calculate the (i) Ex-right value of a share; (ii) Value of a right share?
Redemption of Preference Shares
7. ABC Ltd. provides you the following information as on 31st March, 2021:
Share capital:
50,000 Equity shares of ` 10 each fully paid – ` 5,00,000;
1,500 10% Redeemable preference shares of `100 each fully paid – ` 1,50,000.
Reserve & Surplus:
Capital reserve – ` 1,00,000;
General reserve –` 80,000;

Profit and Loss Account – `95,000.

On 1st April 2021, the Board of Directors decided to redeem the preference shares at
premium of 10% by utilization of reserves.
You are required to prepare necessary Journal Entries including cash transactions in the
books of the company.
Redemption of Debentures
8. The following balances appeared in the books of Omega Ltd. as on 1-4-2020:
(i) 10 % Debentures ` 75,00,000
(ii) Balance of DRR ` 2,50,000
(iii) DRR Investment ` 11,25,000 represented by 10% ` 11,250 Secured Bonds of the
Government of India of ` 100 each.
Annual contribution to the DRR was made as per the requirement. On 31-3-2021, balance
at bank was ` 80,00,000 before receipt of interest. Interest on Debentures had already
been paid. The investments were realized at par for redemption of debentures at a premium
of 10% on the above date.
Omega Ltd. is an unlisted company (other than AIFI, Banking company, NBFC and HFC).
You are required to prepare Debenture Redemption Reserve Account, Debenture
Redemption Reserve Investment Account and Bank Account in the books of Omega Ltd.
for the year ended 31st March, 2021.
Investment Accounts
9. On 1st April, 2019 Mr. Shyam had an opening balance of 1000 equity shares of X Ltd
` 1,20,000 (face value `100 each).
On 5.04.2019 he further purchased 200 cum-right shares for ` 135 each. On 8.04.2019
the director of X Ltd announced right issue in the ratio of 1:6.
Mr. Shyam waived off 100% of his entitlement of right issue in the favour of Mr . Rahul at
the rate of ` 20 each.
All the shares held by Shyam had been acquired on cum right basis and the total market
price (ex-right) of all these shares after the declaration of rights got reduced by ` 3,400.
On 10.10.2019 Shyam sold 350 shares for ` 140 each.
31.03.2020 The market price of each share is ` 125 each.
You are required to prepare the Investment account in the books of Mr. Shyam for the year
ended 31.03.2020 assuming that the shares are being valued at average cost.

Insurance Claim for loss of stock

10. Ram’s godown caught fire on 29th August, 2020. Large part of the stock of goods was
destroyed and goods costing ` 56,350 could be salvaged. Ram provides you the following
additional information:
`
Cost of stock on 1st April, 2019 3,55,250
Cost of stock on 31st March, 2020 3,95,050
Purchases during the year ended 31st March, 2020 28,39,800
Purchases from 1st April, 2020 to the date of fire 16,55,350
Cost of goods distributed as samples for advertising from 1st April, 2020
20,500
to the date of fire
Cost of goods withdrawn by trader for personal use from 1st April, 2020
to the date of fire 1,000
Sales for the year ended 31st March, 2020 40,00,000
Sales from 1st April, 2020 to the date of fire 22,68,000
Ram had taken the fire insurance policy for ` 4,00,000 with an average clause. You are
required to compute the amount of the claim that will be admitted by the insurance
company.
Hire Purchase Transactions
11. (a) What is meant by repossession. What is the treatment for repossession in the books
of Hire Purchaser?
(b) On 1st April 2018 M/s KMR acquired a machine on hire purchase from M/s PQR on
the following terms:
(1) Cash price of the machine was ` 2,40,000.
(2) The down payment at the time of signing the contract was ` 96,000.
(3) The balance amount is to be paid in 3 equal annual instalments plus interest.
(4) Interest is chargeable @ 8% p.a.
On this basis prepare the H.P. Interest Suspense Account and Account of M/s PQR
in the books of the purchaser for the period of hire purchase.

Departmental Accounts
12. Below balances are taken from the records of M/s Big Shopping Complex for the year
ended 31st March, 2020:
Details Department P (`) Department Q (`)
Opening Stock 1,00,000 80,000
Purchases 13,00,000 18,20,000
Sales 20,00,000 30,00,000
• Closing stock of Department P was ` 2,00,000 including goods transferred from
Department Q for ` 40,000.
• Closing stock of Department Q was ` 4,00,000 including goods transferred from
Department P for ` 60,000.
• Opening stock of Department P included goods for ` 20,000 transferred from
Department Q and Opening stock of Department Q included goods for ` 30,000
transferred from Department P.
• Assume that above transfer amounts are cost to the transferee departments and the
rate of gross profit is uniform from year to year.
• Total selling expenses incurred were ` 2,50,000 for both the departments.
From the above information, prepare Departmental Trading Account and Profit & Loss
Account for the year ended 31 st March 2020, after adjusting the unrealized departmental
profits, if any.
Accounting for Branches
13. Alpha Ltd. has a retail shop under the supervision of a manager. The ratio of gross profit
at selling price is constant at 25 per cent throughout the year to 31 st March, 2020.
Branch manager is entitled to a commission of 10 per cent of the profit earned by his
branch, calculated before charging his commission but subject to a deduction from such
commission equal to 25 per cent of any ascertained deficiency of branch stock. All goods
were supplied to the branch from head office.
The following details for the year ended 31 st March, 2020 are given as follows:
` `
Opening Stock (at cost) 74,736 Chargeable expenses 49,120
Goods sent to branch (at 2,89,680 Closing Stock (Selling 1,23,328
cost) Price)
Sales 3,61,280

Manager’s commission paid

on account 2,400
From the above details, you are required to calculate the commission due to manager for
the year ended 31 st March, 2020.
Accounts from Incomplete Records
14. Ram carried on business as retail merchant. He has not maintained regular account books.
However, he always maintained ` 10,000 in cash and deposited the balance into the bank
account. He informs you that he has sold goods at profit of 25% on sales.
Following information is given to you:
Assets and Liabilities As on 1.4.2020 As on 31.3.2021
Cash in Hand 10,000 10,000
Sundry Creditors 40,000 90,000
Cash at Bank 50,000 (Cr.) 80,000 (Dr.)
Sundry Debtors 1,00,000 3,50,000
Stock in Trade 2,80,000 ?
Ram’s capital 3,00,000 ?
Analysis of his bank pass book reveals the following information:

(a) Payment to creditors ` 7,00,000
(b) Payment for business expenses ` 1,20,000
(c) Receipts from debtors ` 7,50,000
(d) Loan ` 1,00,000 taken on 1.10.2020 at 10% per annum
(e) Cash deposited in the bank ` 1,00,000
He informs you that he paid creditors for goods ` 20,000 in cash and salaries ` 40,000 in
cash. He has drawn ` 80,000 in cash for personal expenses. During the year Ram had
not introduced any additional capital. Surplus cash if any, to be taken as cash sales. All
purchases are on credit basis.
You are required to prepare: Trading and Profit and Loss Account for the year ended
31.3.2021 and Balance Sheet as at 31 st March, 2021.
Framework for Preparation and Presentation of Financial Statements
15. (a) With regard to financial statements, name any five qualitative characteristics and
elements.

(b) Aman started a business on 1 st April 2020 with ` 24,00,000 represented by 1,20,000
units of ` 20 each. During the financial year ending on 31 st March, 2021, he sold the
entire stock for ` 30 each. In order to maintain the capital intact, calculate the
maximum amount, which can be withdrawn by Aman in the year 2020-21 if Financial
Capital is maintained at historical cost.
Accounting Standards
AS 1 Disclosure of Accounting Policies
16. (a) The draft results of Surya Ltd. for the year ended 31st March, 2020, prepared on the
hitherto followed accounting policies and presented for perusal of the board of
directors showed a deficit of ` 10 crores. The board in consultation with the managing
director, decided to value year-end inventory at works cost (` 50 crores) instead of
the hitherto method of valuation of inventory at prime cost (` 30 crores). As chief
accountant of the company, you are asked by the managing director to draft the notes
on accounts for inclusion in the annual report for 2019-2020.
AS 2 Valuation of Inventories
(b) The inventory of Rich Ltd. as on 31 st March, 2020 comprises of Product – A: 200 units
and Product – B: 800 units.
Details of cost for these products are:
Product – A: Material cost, wages cost and overhead cost of each unit are ` 40,
` 30 and ` 20 respectively, Each unit is sold at ` 110, selling expenses amounts to
10% of selling costs.
Product – B: Material cost and wages cost of each unit are ` 45 and ` 35 respectively
and normal selling rate is ` 150 each, however due to defect in the manufacturing
process 800 units of Product-B were expected to be sold at ` 70.
You are requested to value closing inventory according to AS 2 after considering the
above.
AS 10 Property, Plant and Equipment
17. You are required to give the correct accounting treatment for the following in line with
provisions of AS 10:
(a) Trozen Ltd. operates a major chain of supermarkets all over India. It acquires a new
store in Pune which requires significant renovation expenditure. It is expected that
the renovations will be done in 2 months during which the store will be closed. The
budget for this period, including expenditure related to construction and remodelling
costs (` 18 lakhs), salaries of staff (` 2 lakhs) who will be preparing the store before
its opening and related utilities costs (` 1.5 lakhs), is prepared. The cost of salaries
of the staff and utilities are operating expenditures that would be incurred even after

the opening of the supermarket. What will the treatment of all these expenditures in
the books of accounts?
(b) ABC Ltd is setting up a new refinery outside the city limits. In order to facilitate the
construction of the refinery and its operations, ABC Ltd. is required to incur
expenditure on the construction/development of railway siding, road and bridge.
Though ABC Ltd. incurs the expenditure on the construction/development, it will not
have ownership rights on these items and they are also available for use to other
entities and public at large. Can ABC Ltd. capitalize expenditure incurred on these
items as property, plant and equipment (PPE)?
AS 11 The Effects of Changes in Foreign Exchange Rates
18. (a) Classify the following items into Monetary and Non-monetary:
(i) Share capital; (ii) Trade Payables; (iii) Cash balance; (iv) Property, plant and
equipment
(b) Trade payables of CAT Ltd. include amount payable to JBB Ltd., ` 10,00,000
recorded at the prevailing exchange rate on the date of transaction, transaction
recorded at US $1 = ` 80.00. The exchange rate on balance sheet date (31.03.2020)
was US $1 = ` 85.00. You are required to calculate the amount of exchange
difference and also explain the accounting treatment needed for this as per AS 11 in
the books of CAT Ltd.
AS 12 Accounting for Government Grants
19. (a) (i) Hygiene Ltd. had received a grant of ` 50 lakh in 2012 from a State Government
towards installation of pollution control machinery on fulfilment of certain
conditions. The company, however, failed to comply with the said conditions
and consequently was required to refund the said amount in 2020.
The company debited the said amount to its machinery account in 2020 on
payment of the same. It also reworked the depreciation for the said machinery
from the date of its purchase and passed necessary adjusting entries in the year
2020 to incorporate the retrospective impact of the same. State whether the
treatment done by the company is correct or not.
(ii) ABC Ltd. received two acres of land received for set up of plant. It also
received `2 lakhs received for purchase of machinery of ` 10 lakhs. Useful
life of machinery is 5 years. Depreciation on this machinery is to be charged
on straight-line basis. How should ABC Ltd. recognize these government grants
in its books of accounts?
AS 13 Accounting for Investments
(b) Paridhi Electronics Ltd. invested in the shares of Dhansukh Ltd. on 1st May 2020 at a
cost of ` 10,00,000. Three fourth of these investments were current investments and

the remaining investments were intended to be held for more than a year. The
published accounts of Dhansukh Ltd. received in January, 2021 reveals that the
company has incurred cash losses with decline in market share and investment of
Paridhi Electronics Ltd. may not fetch more than 7,50,000. The reduction in value is
apparent to be non-temporary.
You are required to explain how you will deal with the above in the financial
statements of the Paridhi Electronics Ltd. as on 31.3.21 with reference to AS 13?
AS 16 Borrowing Costs
20. (a) When capitalisation of borrowing cost should cease as per Accounting Standard 16?
Explain in brief.
AS 11 The Effects of Changes in Foreign Exchange Rates and AS 16 Borrowing Costs
(b) Shan Builders Limited has borrowed a sum of US $ 10,00,000 at the beginning of
Financial Year 2019-20 for its residential project at 4 %. The interest is payable at the
end of the Financial Year. At the time of availment, exchange rate was ` 56 per US $
and the rate as on 31 st March, 2020 ` 62 per US $. If Shan Builders Limited had
borrowed the loan in India in Indian Rupee equivalent, the pricing of loan would have
been 10.50%. You are required to compute Borrowing Cost and exchange difference
for the year ending 31 st March, 2020 as per applicable Accounting Standards.
SUGSTED ANSWERS
1. Balance Sheet of Om Ltd. as at 31 st March, 2021

Note
Particulars (`)
No.
I Equity and Liabilities
(1) Shareholders' Funds
(a) Share Capital 1 19,90,000
(b) Reserves and Surplus 2 3,82,000
(2) Current Liabilities
(a) Trade Payables 2,40,500
(b) Other Current Liabilities 3 61,500
(c) Short-Term Provisions 4 1,35,000
Total 28,09,000
II ASSETS
(1) Non-Current Assets
(a) Property, Plant and Equipment 5 16,97,500

(2) Current Assets

(a) Inventories 7,05,000
(b) Trade Receivables 6 3,75,500
(c) Cash and Cash Equivalents 7 31,000
Total 28,09,000
Statement of Profit and Loss of Om Ltd.
for the year ended 31 st March, 2021
Particulars Note No. (`)
I Revenue from Operations 36,17,000
II Other Income 8 36,500
III Total Revenue [I + II] 36,53,500
IV Expenses:
Cost of purchases 12,32,500
Changes in Inventories [6,65,000-7,05,000] (40,000)
Employee Benefits Expenses 9 15,04,000
Depreciation and Amortization Expenses 82,500
Other Expenses 10 4,24,500
Total Expenses 32,03,500
V Profit before Tax (III-IV) 4,50,000
VI Tax Expenses @ 30% (1,35,000)
VII Profit for the period 3,15,000
Notes to Accounts:
1. Share Capital
Authorized Capital
5,00,000 Equity Shares of ` 10 each 50,00,000
Issued Capital
2,00,000 Equity Shares of ` 10 each 20,00,000
Subscribed Capital and fully paid
1,95,000 Equity Shares of `10 each 19,50,000
Subscribed Capital but not fully paid
5,000 Equity Shares of `10 each ` 8 paid 40,000
(Call unpaid `10,000) 19,90,000

2. Reserves and Surplus

General Reserve 10,000
Surplus i.e. Balance in Statement of Profit & Loss:
Opening Balance 67,000
Add: Profit for the period 3,15,000
Less: Transfer to Reserve (10,000) 3,72,000
3,82,000
3. Other Current Liabilities
Outstanding Expenses [25,000+36,500] 61,500
4. Short-term Provisions
Provision for Tax 1,35,000
5. Property, Plant and Equipment
Particulars Value given Depreciation Depreciation Written down
(`) rate Charged value at the end
(`) (`)
Land 7,30,000 - 7,30,000
Plant & Machinery 7,50,000 5% 37,500 7,12,500
Furniture & Fixtures 1,50,000 10% 15,000 1,35,000
Engineering Tools 1,50,000 20% 30,000 1,20,000
17,80,000 82,500 16,97,500
6. Trade Receivables
Trade receivables 4,00,500
Less: Provision for doubtful debts (25,000)
3,75,500
7. Cash & Cash Equivalent
Cash Balance 11,000
Bank Balance in current A/c 20,000
31,000
8. Other Income
Miscellaneous Income (Transfer fees) 6,500
Rental Income 30,000
36,500

9. Employee benefits expenses

Wages 14,79,000
Add: Outstanding wages 25,000
15,04,000
10. Other Expenses
Carriage Inwards 57,500
Discount & Rebates 30,000
Advertisement 15,000
Rate, Taxes and Insurance 55,000
Repairs to Buildings 56,500
Commission & Brokerage 67,500
Miscellaneous Expenses [56,000+36,500] (Business Expenses) 92,500
Bad Debts 25,500
Provision for Doubtful Debts 25,000
4,24,500
2. (a) Amount that can be drawn from reserves for (10% dividend on ` 50,00,000 i.e.
` 5,00,000)
Profits available
Current year profit ` 1,42,500
Amount which can be utilized from reserves (` 5,00,000 – 1,42,500) ` 3,57,500
Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 20X1:
Condition I
Since 10% is lower than the average rate of dividend (12%), 10% dividend can be
declared.
Condition II
Maximum amount that can be drawn from the accumulated profits and reserves
should not exceed 10% of paid up capital plus free reserves ie. ` 7,50,000 [10% of
(50,00,000 + 25,00,000)]

Condition III
The balance of reserves after drawl ` 21,42,500 (` 25,00,000 - ` 3,57,500) should
not fall below 15 % of its paid up capital ie. ` 7,50,000 (15% of ` 50,00,000]
Since all the three conditions are satisfied, the company can withdraw ` 3,57,500
from accumulated reserve (as per Declaration and Payment of Dividend Rules, 2014).
(b) Computation of effective capital:
Where Mohit Where Mohit
Ltd.is a non- Ltd.is an
investment investment
company company
Paid-up share capital —
77,500, 14% Preference shares 77,50,000 77,50,000
5,40,000 Equity shares 4,32,00,000 4,32,00,000
Capital reserves 3,77,500 3,77,500
Securities premium 2,25,000 2,25,000
15% Debentures 2,92,50,000 2,92,50,000
Public Deposits 16,65,000 16,65,000
(A) 8,24,67,500 8,24,67,500
Investments 3,50,50,000 -
Profit and Loss account (Dr. balance) 68,50,000 68,50,000
(B) 4,19,00,000 68,50,000
Effective capital (A–B) 4,05,67,500 7,56,17,500
3. Supriya Ltd.
Cash Flow Statement for the year ended 31st March, 2021
(Using direct method)
(` ’000)
Cash flows from operating activities
Cash receipts from customers 2,783
Cash payments to suppliers (2,047)
Cash paid to employees (69)
Other cash payments (for overheads) (115)
Cash generated from operations 552

Income taxes paid (243)

Net cash from operating activities 309
Cash flows from investing activities
Payments for purchase of Property, Plant and Equipment (102)
Net cash used in investing activities (102)
Cash flows from financing activities
Proceeds from issuance of share capital 300
Bank loan repaid (250)
Dividend paid (80)
Net cash used in financing activities (30)
Net increase in cash and cash equivalents 177
Cash and cash equivalents at beginning of period 35
Cash and cash equivalents at end of period 212
4. (a) Time ratio:
Pre-incorporation period (1.4.2020 to 1.7.2020) = 3 months
Post incorporation period (1.7.2020 to 31.3.2021) = 9 months
Time ratio = 3 : 9 or 1 : 3
Sales ratio:
Average monthly sale before incorporation was twice the average sale per month of
the post incorporation period. If weightage for each post-incorporation month is x,
then
Weighted sales ratio = 3  2x : 9  1x = 6x : 9x or 2 : 3
(b) Statement showing the calculation of profits/losses for pre incorporation
and Post incorporation period profits of Sanjana Ltd.
Particulars Basis Pre Post
` `
Sales (given) 10,000 40,000
Less: Purchases (given) 3,125 21,875
Carriage Inwards 1:7 125 875
Gross Profit (i) 6,750 17,250
Less: Selling Expenses 1:4 700 2,800

Preliminary Expenses 1,200

Salaries 1:3 900 2,700
Director Fees 1,200
Interest on capital 700
Depreciation 1:3 700 2,100
Rent 1:3 1,200 3,600
Total of Expenses(ii) 4,200 13,600
Pre-incorporation/Net Profit (i-ii) 2,550 3,650
Working Notes:
1: Sales Ratio = 10,000 : 40,000 = 1 :4
2: Time Ratio = 3:9 = 1:3
5. Journal Entries in the books of Umesh Ltd.
` `
1-4-2021 Equity share final call A/c Dr. 6,00,000
To Equity share capital A/c 6,00,000
(For final calls of ` 2 per share on 3,00,000
equity shares due as per Board’s Resolution
dated….)
20-4-2021 Bank A/c Dr. 6,00,000
To Equity share final call A/c 6,00,000
(For final call money on 3,00,000 equity
shares received)
Securities Premium A/c Dr. 75,000
Capital redemption reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 1,95,000
To Bonus to shareholders A/c 7,50,000
(For making provision for bonus issue of one
share for every four shares held)
Bonus to shareholders A/c Dr. 7,50,000
To Equity share capital A/c 7,50,000
(For issue of bonus shares)

6. (a)
D` `
Bank A/c Dr. 25,000
To Equity share capital A/c 25,000
(For rights share issued at par value in the ratio of 1:8
equity shares due as per Board’s Resolution dated….)
Working Note:
Number of Rights shares to be issued- 20,000/8x1= 2,500 shares
(b) Ex-right value of the shares
= (Cum-right value of the existing shares + Rights shares x Issue Price) / (Existing
No. of shares + No. of right shares) = (` 200 X 5 Shares + ` 125 X 1 Share)/(5+1)
Shares
= ` 1,125 / 6 shares = ` 187.50 per share.
Value of right = Cum-right value of the share – Ex-right value of the share
= ` 200 – ` 187.50 = ` 12.50 per share.
7. In the books of ABC Limited
Journal Entries
Date Particulars Dr. (`) Cr. (`)
2021
April 1 10% Redeemable Preference Share Capital A/c Dr. 1,50,000
Premium on Redemption of Preference Shares 15,000
To Preference Shareholders A/c 1,65,000
(Being the amount payable on redemption
transferred to Preference Shareholders
Account)
Preference Shareholders A/c Dr. 1,65,000
To Bank A/c 1,65,000
(Being the amount paid on redemption of
preference shares)
General Reserve A/c Dr. 80,000
Profit & Loss A/c Dr. 70,000
To Capital Redemption Reserve A/c 1,50,000
(Being the amount transferred to Capital
Redemption Reserve Account as per the

requirement of the Act)

Profit & Loss A/c Dr. 15,000
To Premium on Redemption of 15,000
Preference Shares A/c
(Being premium on redemption charged to
Profit and Loss A/c)
Note: Capital reserve cannot be utilized for transfer to Capital Redemption Reserve.
8. Debenture Redemption Reserve Account
Date Particulars ` Date Particulars `
31st March, 2021 To General 1st April, By Balance b/d 2,50,000
reserve A/c 7,50,000 2020
(Refer Note)
1st April, By Profit and loss A/c 5,00,000
2020 (Refer Note 1)
7,50,000 7,50,000
10% Secured Bonds of Govt. (DRR Investment) A/c

` `
1st April, 2020 To Balance b/d 11,25,000 31st March, 2021 By Bank A/c 11,25,000
11,25,000 11,25,000
Bank Account
` `
31st March, To Balance b/d 80,00,000 31st March, By Debenture holders 82,50,000
2021 To Interest on 1,12,500 2021 A/c
DRR Investment (110% of 75,00,000)
(11,25,000X 10%)
To DRR By Balance c/d 9,87,500
Investment A/c 11,25,000
92,37,500 92,37,500
Working note –
Calculation of DRR before redemption = 10% of ` 75,00,000 = 7,50,000
Available balance = ` 2,50,000
DRR required =7,50,000 – 2,50,000= ` 5,00,000.

9. In the books of Mr. Shyam

for the year ending on 31-3-2020
(Scrip: Equity Shares of X Limited)
Date Particulars Qty Amount Date Particulars Qty Amount
1.4.2019 To Balance 1000 1,20,000 8.04.2019 By Bank A/c (W.N.1) 3,400
b/d
5.04.2019 To Bank 200 27,000 10.10.2019 By Bank A/c 350 49,000
(200x `135) (350x `140)
10.10.2019 To Profit & 7,117 31.3.2020 By Balance c/d 850 1,01,717
Loss A/c (W.N.3)
(W.N.2)
1200 1,54,117 1200 1,54,117
Working Notes:
1. Sale of Rights ` 4,000
The market price of all shares of X Ltd after shares becoming ex-rights has been
reduced by ` 3,400
In this case out of sale proceeds of `4,000; ` 3,400 may be applied to reduce the
carrying amount to the market value and ` 600 would be credited to the profit and
loss account.
2. Profit on sale of 350 shares
Amount
Sale price of 350 shares (350 shares X 140 each) ` 49,000
Less: Cost of 350 shares [(1,20,000+27,000-3,400) X350]/1200 ` 41,883
Profit ` 7,117
3. Valuation of 850 shares as on 31.03.2020
Particulars Amount
Cost price of 850 shares ` 1,01,717
[(1,20,000 +27,000 -3,400) x 850 /1,200]
Fair Value as on 31.03.2020 [850 X ` 125 each] ` 1,06,250
Cost price or fair value whichever is less ` 1,01,717

10. Memorandum Trading Account for the period 1st April, 2020 to 29th August 2020
` `
To Opening Stock 3,95,050 By Sales 22,68,000
To Purchases 16,55,350 By Closing stock (Bal. fig.) 4,41,300
Less: Advertisement (20,500)
Drawings (1,000) 16,33,850
To Gross Profit [30% of
Sales] [W N] 6,80,400
27,09,300 27,09,300
Statement of Insurance Claim

`
Value of stock destroyed by fire 4,41,300
Less: Salvaged Stock (56,350)
3,84,950
Note: Since policy amount is less than the value of stock on date of fire, average clause
will apply.
` 4,00,000/4,41,300 X 3,84,950= ` 3,48,924 (rounded off)
Therefore, claim amount of ` 3,48,924 will be admitted by the Insurance Company.
Working Note:
Trading Account for the year ended 31 st March, 2020
` `
To Opening Stock 3,55,250 By Sales 40,00,000
To Purchases 28,39,800 By Closing stock 3,95,050
To Gross Profit 12,00,000
43,95,050 43,95,050
Rate of Gross Profit in 2019-20
Gross Pr ofit
 100 = 12,00,000/40,00,000 x 100 = 30%
Sales
11. (a) Repossession is the Right of the Seller to take back the goods sold from the Hire
purchaser in case of any default by the Hire purchaser and can sell the goods after
reconditioning to any other person. The hire purchaser closes the Hire Vendor’s
Account by transferring the balance of Hire Vendor Account to Hire Purchase Asset
and then finding the profit and loss on repossession in Asset Account.

(b) In the books of M/s KMR (purchaser)

H.P. Interest Suspense Account
1.4.18 To M/s PQR A/c 23,040 31.3.19 By Interest A/c 11,520
(W.N.)
31.3.19 By Balance c/d 11,520
23,040 23,040
1.4.19 To Balance b/d 11,520 31.3.20 By Interest A/c 7,680
31.3.20 By Balance c/d 3,840
11,520 11,520
1.4.20 To Balance b/d 3,840 31.3.21 By Interest A/c 3,840
M/s PQR Account
1.4.18 To Bank/Cash A/c 96,000 1.4.18 By Machine A/c 2,40,000
31.3.19 To Bank/Cash A/c 59,520 1.4.18 By H.P. Interest 23,040
Suspense A/c
31.3.18 To Balance c/d 1,07,520
2,63,040 2,63,040
31.3.20 To Bank/Cash A/c 55,680 1.4.19 By Balance b/d 1,07,520
31.3.20 To Balance c/d 51,840
1,07,520 1,07,520
31.3.21 To Bank/Cash A/c 51,840 1.4.20 By Balance b/d 51,840
Working Note:
Cash Price 2,40,000
Down Payment 96,000
1,44,000
` 1,44,000 to be paid in 3 instalments ie. ` 48,000 plus interest
Total interest = ` 11,520 + ` 7,680 + ` 3,840 = ` 23,040
12. Departmental Trading and Profit & Loss A/c for M/s Big Shopping Complex
For the year ended 31st March 2020
Details Deptt. P Deptt. Q Details Deptt. P Deptt. Q
(`) (`) (`) (`)
To Opening Stock 1,00,000 80,000 By Sales 20,00,000 30,00,000
To Purchases 13,00,000 18,20,000 2,00,000 4,00,000

To Gross Profit 8,00,000 15,00,000 By Closing

Stock
22,00,000 34,00,000 22,00,000 34,00,000
To Selling Exp 1,00,000 1,50,000 By Gross Profit 8,00,000 15,00,000
(in ratio of sales)
To Profit transferred 7,00,000 13,50,000
to General P&L A/c
8,00,000 15,00,000 8,00,000 15,00,000
General Profit and Loss A/c for M/s Big Shopping Complex
For the year ended 31st March 2020
Details Amount (`) Details Amount (`)
To Stock Reserve By Profit transferred from
Deptt. P WN 1 & 2 Deptt. P 7,00,000
50% x (40,000 – 20,000) 10,000 Deptt. Q 13,50,000
Deptt. Q WN 1 & 3
40% x (60,000 – 30,000) 12,000
To Net Profit 20,28,000
20,50,000 20,50,000
Working Notes:
1. Gross Profit Ratios are: Deptt. P = 8,00,000 / 20,00,000 = 40% and of
Deptt. Q = 15,00,000 / 30,00,000 = 50%.
2. Stock Reserve for Deptt. P shall be adjusted as per the gross profit ratio of
Deptt. Q i.e. 50% (On Closing Stock – Opening Stock)
3. Stock Reserve for Deptt. Q shall be adjusted as per the gross profit ratio of
Deptt. P i.e. 40% (On Closing Stock – Opening Stock)
13. In the books of Alpha Ltd.
Step 1: Calculation of Deficiency
Branch stock account (at invoice price)
Particulars ` Particulars `
To Opening Stock (` 74,736 + 1/3 By Sales 3,61,280
of ` 74,736) 99,648
To Goods sent to Branch A/c By Closing Stock 1,23,328
(` 2,89,680 + 1/3 of ` 2,89,680) 3,86,240
By Deficiency at sale
price [Balancing figure] 1,280
4,85,888 4,85,888

Step 2: Calculation of Net Profit before Commission

Branch account
Particulars ` Particulars `
To Opening Stock 99,648 By Sales 3,61,280
[`74,736 + 1/3 of ` 74,736]
To Gross sent to Branch A/c 3,86,240 By Closing Stock 1,23,328
(` 2,89,680 + 1/3 of
` 2,89,680)
To Expenses 49,120 By Stock Reserve A/c 24,912
To Stock Reserve A/c 30,832 By Goods sent to 96,560
[` 1,23,328 x 25/100] Branch
A/c
To Net Profit – subject to
manager’s commission 40,240
6,06,080 6,06,080
Step 3: Calculation of Commission still due to manager
`
A Calculation at 10% profit before charging his commission
[` 40,240 x 10/100] 4,024
B Less: 25% of cost of deficiency in stock [25% of (75% of ` 1,280)] (240)
C Commission for the year [A-B] 3,784
D Less: Paid on account (2,400)
E Balance due (C-D) 1,384
14. Trading and Profit and Loss Account of Ram
` `
To Opening stock 2,80,000 By Sales
To Purchases 7,70,000 Cash 2,40,000
To Gross Profit @ 25% 3,10,000 Credit 10,00,000 12,40,000
By Closing Stock (bal.fig.) 1,20,000
13,60,000 13,60,000
To Salaries 40,000 By Gross Profit 3,10,000
To Business expenses 1,20,000
To Interest on loan 5,000

(10% of 1,00,000 x
6/12)
To Net Profit 1,45,000
3,10,000 3,10,000
Balance Sheet of Ram as at 31 st March, 2021
Liabilities ` ` Assets `
Ram’s capital: Cash in hand 10,000
Opening 3,00,000 Cash at Bank 80,000
Add: Net Profit 1,45,000 Sundry Debtors 3,50,000
4,45,000 Stock in trade 1,20,000
Less: Drawings (80,000) 3,65,000
Loan (including interest due) 1,05,000
Sundry Creditors 90,000 _______
5,60,000 5,60,000
Working Notes:
1. Sundry Debtors Account
` `
To Balance b/d 1,00,000 By Bank A/c 7,50,000
To Credit sales (Bal. fig) 10,00,000 By Balance c/d 3,50,000
11,00,000 11,00,000
2. Sundry Creditors Account
` `
To Bank A/c 7,00,000 By Balance b/d 40,000
To Cash A/c 20,000 By Purchases (Bal. fig.) 7,70,000
To Balance c/d 90,000
8,10,000 8,10,000
3. Cash and Bank Account
Cash Bank Cash Bank
` ` ` `
To Balance b/d 10,000 By Balance b/d 50,000
To Sales (bal. fig) 2,40,000 By Bank A/c (C) 1,00,000
To Cash (C) 1,00,000 By Salaries 40,000
To Debtors 7,50,000 By Creditors 20,000 7,00,000
To Loan 1,00,000 By Drawings 80,000

By Business 1,20,000
expenses
By Balance c/d 10,000 80,000
2,50,000 9,50,000 2,50,000 9,50,000
15. (a) (i) Qualitative Characteristics of Financial Statements:
Understandability, Relevance, Comparability, Reliability & Faithful Representation
(ii) Elements of Financial Statements:
Asset, Liability, Equity, Income/Gain and Expense/Loss
(b)
Particulars Financial Capital Maintenance at
Historical Cost (`)
Closing equity
36,00,000 represented by cash
(` 30 x 1,20,000 units)
Opening equity 1,20,000 units x ` 20 = 24,00,000
Permissible drawings to keep Capital 12,00,000 (36,00,000 – 24,00,000)
intact
16. (a) As per AS 1, any change in the accounting policies which has a material effect in the
current period or which is reasonably expected to have a material effect in later
periods should be disclosed. In the case of a change in accounting policies which has
a material effect in the current period, the amount by which any item in the financial
statements is affected by such change should also be disclosed to the extent
ascertainable. Where such amount is not ascertainable, wholly or in part, the fact
should be indicated. Accordingly, the notes on accounts should properly disclose the
change and its effect.
Notes on Accounts:
“During the year inventory has been valued at factory cost, against the practice of
valuing it at prime cost as was the practice till last year. This has been done to take
cognizance of the more capital intensive method of production on account of heavy
capital expenditure during the year. As a result of this change, the year-end inventory
has been valued at ` 50 crores and the profit for the year is increased by ` 20 crores.”
(b) According to AS 2 ‘Valuation of Inventories’, inventories should be valued at the lower
of cost and net realizable value.
Product – A
Material cost ` 40 x 200 = 8,000
Wages cost ` 30 x 200 = 6,000

Overhead ` 20 x 200 = 4,000

Total cost ` 18,000
Realizable value [200 x (110-11)] ` 19,800
Hence inventory value of Product -A ` 18,000
Product – B
Material cost ` 45 x 800 = 36,000
Wages cost ` 35 x 800 = 28,000
Total cost ` 64,000
Realizable value (800 x 70) ` 56,000
Hence inventory value of Product-B ` 56,000
Total Value of closing inventory i.e. Product A + Product B ` 74,000
(18,000+ 56,000)
17. (a) Trozen Ltd. should capitalize the costs of construction and remodelling the
supermarket, because they are necessary to bring the store to the condition
necessary for it to be capable of operating in the manner intended. The supermarket
cannot be opened without incurring the remodelling expenditure. Therefore, this
construction and remodelling expenditure of ` 18 lakh should be considered as part
of the cost of the asset. However, the cost of salaries of the staff ` 2 lakh and utilities
cost ` 1.5 lakh are operating expenditures that would be incurred even after the
opening of the supermarket. Therefore, these costs are not necessary to bring the
store to the condition necessary for it to be capable of operating in the manner
intended by the management and should be expensed.
(b) AS 10 states that the cost of an item of property, plant and equipment shall be
recognized as an asset if, and only if:
(a) it is probable that future economic benefits associated with the item will flow to
the entity; and
(b) the cost of the item can be measured reliably.
Further, the standard provides that the standard does not prescribe the unit of
measure for recognition, i.e., what constitutes an item of property, plant and
equipment. Thus, judgement is required in applying the recognition criteria to an
entity’s specific circumstances. The cost of an item of property, plant and equipment
comprise any costs directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner intended by
management.
In the given case, railway siding, road and bridge are required to facilitate the
construction of the refinery and for its operations. Expenditure on these items is

required to be incurred in order to get future economic benefits from the proj ect as a
whole which can be considered as the unit of measure for the purpose of capitalization
of the said expenditure even though the company cannot restrict the access of others
for using the assets individually. It is apparent that the aforesaid expenditure is
directly attributable to bringing the asset to the location and condition necessary for
it to be capable of operating in the manner intended by management.
In view of this, even though ABC Ltd. may not be able to recognize expenditure
incurred on these assets as an individual item of property, plant and equipment in
many cases (where it cannot restrict others from using the asset), expenditure
incurred may be capitalized as a part of overall cost of the project. From this, it can
be concluded that, in the given case the expenditure incurred on these assets, i.e.,
railway siding, road and bridge, should be considered as the cost of constructing the
refinery and accordingly, expenditure incurred on these items should be allocated and
capitalized as part of the items of property, plant and equipment of the refinery.
18. (a) Share capital - Non-monetary; Trade Payables - Monetary
Cash balance – Monetary; Property, plant and equipment - Non-monetary
(b) Amount of Exchange difference and its Accounting Treatment
Foreign `
Currency Rate
Trade payables
Initial recognition US $ 12,500 (`10,00,000/80) 1 US $ = ` 80 10,00,000
Rate on Balance sheet date 1 US $ = ` 85
Exchange Difference loss US $ 12,500 x ` (85-80) 62,500
Treatment:
Debit Profit and Loss A/c by ` 62,500 and Credit
Trade Payables
Thus, Exchange Difference on trade payables amounting ` 62,500 is required to be
transferred to Profit and Loss.
19. (a) (i) As per the facts of the case, Hygiene Ltd. had received a grant of ` 50 lakh in 2012
from a State Government towards installation of pollution control machinery on
fulfilment of certain conditions. However, the amount of grant has to be refunded
since it failed to comply with the prescribed conditions. In such circumstances, AS
12, “Accounting for Government Grants”, requires that the amount refundable in
respect of a government grant related to a specific fixed asset is recorded by
increasing the book value of the asset or by reducing the capital reserve or the
deferred income balance, as appropriate, by the amount refundable. The Standard
further makes it clear that in the first alternative, i.e., where the book value of the

asset is increased, depreciation on the revised book value should be provided

prospectively over the residual useful life of the asset. Accordingly, the accounting
treatment given by Hygiene Ltd. of increasing the value of the plant and machinery
is quite proper. However, the accounting treatment in respect of depreciation given
by the company of adjustment of depreciation with retrospective effect is improper
and constitutes violation of AS 12.
(ii) ABC Ltd. should recognize the grants in the following manner:
● As per AS 12, government grants may take the form of non-monetary
assets, such as land or other resources, given at concessional rates. In
these circumstances, it is usual to account for such assets at their
acquisition cost. Non-monetary assets given free of cost are recorded at a
nominal value. Accordingly, land should be recognised at nominal value in
the balance sheet.
● The standard provides option to treat the grant either as a deduction from
the gross value of the asset or to treat it as deferred income as per
provisions of the standard. Under first method, the grant is shown as a
deduction from the gross value of the asset concerned in arriving at its
book value. The grant is thus recognised in the profit and loss statement
over the useful life of a depreciable asset by way of a reduced depreciation
charge. Accordingly, the grant of ` 2 lakhs is deducted from the cost of the
machinery. Machinery will be recognised in the books at ` 10 lakhs – ` 2
lakhs = ` 8 lakhs and depreciation will be charged on it as follows:
` 8 lakhs/ 5 years = ` 1.60 lakhs per year.
Under the second method, grants related to depreciable assets are treated
as deferred income which is recognised in the profit and loss statement on
a systematic and rational basis over the useful life of the asset. Such
allocation to income is usually made over the periods and in the proportions
in which depreciation on related assets is charged. ` 2 lakhs should be
recognised as deferred income and will be transferred to profit and loss
over the useful life of the asset. In this case, ` 40,000
[` 2 lakhs / 5 years] should be credited to profit and loss each year over
the period of 5 years.
(b) As per AS 13, “Accounting for Investments”, carrying amount for current investments is
the lower of cost and fair value. But long term investments should be carried in the
financial statements at cost. However, provision for diminution shall be made to recognize
a decline, other than temporary, in the value of the investments, such reduction being
determined and made for each investment individually. The standard also states that
indicators of the value of an investment are obtained by reference to its market value, the
investee's assets and results and the expected cash flows from the investment.

Paridhi Ltd. made three fourth of ` 10,00,000 ie. `7,50,000 as current investment and
remaining ` 2,50,000 as long term. The facts of the case given in the question clearly
suggest that the provision for diminution should be made to reduce the carrying
amount of shares for both categories of shares to bring them to market value. Hence
the carrying value of investments will be shown at amount of ` 7,50,000 in the
financial statements for the year ended 31st March, 2021 and charge the difference
of loss of ` 2,50,000 to profit and loss account.
20. (a) Capitalization of borrowing costs should cease when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete.
An asset is normally ready for its intended use or sale when its physical construction
or production is complete even though routine administrative work might still continue.
If minor modifications such as the decoration of a property to the user’s specification,
are all that are outstanding, this indicates that substantially all the activi ties are
complete. When the construction of a qualifying asset is completed in parts and a
completed part is capable of being used while construction continues for the other
parts, capitalization of borrowing costs in relation to a part should cease when
substantially all the activities necessary to prepare that part for its intended use or
sale are complete.
(b) (i) Interest for the period 2019-20
= US $ 10 lakhs x 4% × ` 62 per US $ = ` 24.80 lakhs
(ii) Increase in the liability towards the principal amount
= US $ 10 lakhs × ` (62 - 56) = ` 60 lakhs
(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs × ` 56 x 10.5% = ` 58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency
borrowing = ` 58.80 lakhs - ` 24.80 lakhs = ` 34 lakhs.
Therefore, out of ` 60 lakhs increase in the liability towards principal amount, only
` 34 lakhs will be considered as the borrowing cost. Thus, total borrowing cost would
be ` 58.80 lakhs being the aggregate of interest of ` 24.80 lakhs on foreign currency
borrowings plus the exchange difference to the extent of difference between interest
on local currency borrowing and interest on foreign currency borrowing of ` 34 lakhs.
Hence, ` 58.80 lakhs would be considered as the borrowing cost to be accounted for
as per AS 16 “Borrowing Costs” and the remaining ` 26 lakhs (60 - 34) would be
considered as the exchange difference to be accounted for as per AS 11 “The Effects
of Changes in Foreign Exchange Rates”.

© The Institute of Chartered Accountants of India

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

© The Institute of Chartered Accountants of India

Uploaded by

Copyright:

Available Formats

PAPER – 1: ACCOUNTING

ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY

A. Applicable for May, 2021 examination